Schertz-Cibolo-Universal City, Independent School District v. Wright (In Re Educators Group Health Trust)

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT

_____________

No. 93-8876
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IN THE MATTER OF: EDUCATORS GROUP HEALTH TRUST,

Debtor.

SCHERTZ-CIBOLO-UNIVERSAL CITY,
INDEPENDENT SCHOOL DISTRICT, ET AL

Appellants,

versus

STANLEY W. WRIGHT, Trustee,

Appellee.

________________________________________________

Appeal from the United States District Court
for the Western District of Texas
________________________________________________
(June 30, 1994)

Before GARWOOD and EMILIO M. GARZA, Circuit Judges, HEAD,*
District Judge.

EMILIO M. GARZA, Circuit Judge:

Schertz-Cibolo-Universal City Independent School District,

Devine Independent School District, Charlotte Independent School

District, Rosebud-Lott Independent School District, Ben Bolt-Palito

Blanco Independent School District, Fairfield Independent School

District, and Ballinger Independent School District ("plaintiff

school districts") appeal from the district court's decision

affirming the bankruptcy court's ruling that certain causes of

*
District Judge of the Southern District of Texas, sitting by
designation.
action filed in state court belong to the bankruptcy estate.

Finding that the bankruptcy court erred in arriving at a legal

standard for determining which causes of action belong to the

bankruptcy estate, we reverse and remand for entry of judgment in

conformity herewith.

I

In August 1983, Education Group Health Trust ("EGHT") was

established to provide health benefits to teachers in small school

districts. The plaintiff school districts are seven of the over

two hundred school districts which participated in EGHT. CRC

Administration ("CRC") was the initial third-party administrator

for EGHT. CRC not only collected premiums and paid claims, but

also marketed EGHT's plan of benefits to various school districts.

The principals of CRC were William Boon, Jerry Cunningham, Henry

Labaj, and Elgin Allen ("defendants"). In 1986, American Group

Life ("AGL") began marketing EGHT's plan of benefits and took over

as third-party administrator for EGHT. The principals of AGL were

identical to those for CRC.

In 1988, EGHT filed for Chapter 7 relief under the Bankruptcy

Code. Stanley Wright was appointed as trustee of the estate. The

school districts participating in EGHT became creditors of the

estate. Two years later, the plaintiff school districts initiated

a lawsuit in state court against the defendants, seeking to recover

damages on various causes of action, including the mismanagement of

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EGHT and fraud.1 The trustee intervened in the state court lawsuit

in order to assert those claims allegedly belonging to the

bankruptcy estate. For the next two years, both the trustee and

the plaintiff school districts participated in the state court

lawsuit.

In 1990, the trustee filed a motion with the bankruptcy court

to determine which party, the plaintiff school districts or the

trustee, has the authority to pursue each particular cause of

action asserted in the state court lawsuit. Both parties submitted

the matter to the bankruptcy court on stipulated facts. The

bankruptcy court entered an order granting the trustee's motion to

determine its authority. In effect, the court divided the causes

of action into three categories: (1) claims which belong solely to

the bankruptcy estate; (2) claims which may belong to the

bankruptcy estate depending upon the facts established at trial;

and (3) claims which belong to the plaintiff school districts. For

the purpose of determining whether a cause of action may belong to

the estate, the court concluded that if the act or omission giving

rise to the claim was directed generally at the school districts

participating in EGHT, then the claim would belong to the estate.

The district court affirmed the decision of the bankruptcy court

with a minor modification. The school districts then filed a

timely notice of appeal from that decision.

II

1
See Appendix.

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 This case requires that we decide whether the bankruptcy court

erred in determining whether certain causes of action are property

of the estate. For our purposes, property of the estate includes

"all legal or equitable interests of the debtor in property as of

the commencement of the case." 11 U.S.C. § 541(a)(1) (1988). The

term "all legal or equitable interests" has been defined broadly to

include causes of action. See Louisiana World Exposition v.

Federal Ins. Co., 858 F.2d 233, 245 (5th Cir. 1988) ("Section

541(a)(1)'s reference to `all legal or equitable interests of the

debtor in property' includes causes of action belonging to the

debtor at the time the case is commenced."); In re Mortgage America

Corp., 714 F.2d 1266, 1274 (1983) (noting that the meaning of the

term "all legal or equitable interests" includes, at the very

least, rights of action). If a cause of action belongs to the

estate, then the trustee has exclusive standing to assert the

claim. See Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153-

54 (5th Cir. 1987) (observing that the "general bankruptcy policy

of ensuring that all similarly-situated creditors are treated

fairly" requires that the trustee have the first opportunity to

pursue estate actions without interference from individual

creditors); see also In re E.F. Hutton Southwest Properties II,

Ltd., 103 B.R. 808, 812 (Bankr. N.D. Tex. 1989) ("If an action

belongs to the estate, the trustee has the power and duty to

prosecute the action for the benefit of all creditors and

shareholders in the estate."). If, on the other hand, a cause of

action belongs solely to the estate's creditors, then the trustee

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has no standing to bring the cause of action. See Caplin v. Marine

Midland Grace Trust Co., 92 S. Ct. 1678, 1688 (1972) (holding that

a trustee does not have standing to sue a third-party on behalf of

debenture holders); In re Rare Coin Galleries of America, Inc., 862

F.2d 896, 900 (1st Cir. 1988) ("The trustee, however, has no power

to assert any claim on behalf of the creditors when the cause of

action belongs solely to them.").

Whether a particular state cause of action belongs to the

estate depends on whether under applicable state law the debtor

could have raised the claim as of the commencement of the case.

See S.I. Acquisition, 817 F.2d at 1142 (examining the cause of

action premised on alter ego under Texas law); MortgageAmerica, 714

F.2d at 1275-1277 (examining the causes of action based on the

Fraudulent Transfers Act and "denuding the corporation" theory

under Texas law). As part of this inquiry, we look at the nature

of the injury for which relief is sought. See E.F. Hutton, 103

B.R. at 812 ("The injury characterization analysis should be

considered as an inseparable component of whether an action belongs

to the [estate] or individual [creditor]."). If a cause of action

alleges only indirect harm to a creditor (i.e., an injury which

derives from harm to the debtor), and the debtor could have raised

a claim for its direct injury under the applicable law, then the

cause of action belongs to the estate. See, e.g., S.I.

Acquisition, 817 F.2d at 1152-53 (concluding that an action based

upon alter ego properly belongs to the estate, where (1) the debtor

could have pierced its own corporate veil under Texas law; and (2)

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the debtor was unable to meets its corporate obligations due to the

misuse of the corporate form, causing a derivative injury to the

individual creditor); MortgageAmerica, 714 F.2d at 1275 (concluding

that an action under the Fraudulent Transfers Act properly belongs

to the estate, where (1) the debtor could have brought the action

to recover its assets; and (2) the debtor is stripped of assets,

causing a derivative injury to the individual creditor).

Conversely, if the cause of action does not explicitly or

implicitly allege harm to the debtor, then the cause of action

could not have been asserted by the debtor as of the commencement

of the case, and thus is not property of the estate.

The bankruptcy court concluded as a matter of law that the

trustee has the exclusive authority to bring certain causes of

action listed in the complaint, based on its conclusion that those

causes of action belong to the estate. The plaintiff school

districts contest the bankruptcy court's legal conclusions, arguing

that (1) the debtor itself was not injured or harmed; and (2) even

if the debtor was harmed, the debtor shared responsibility for such

harm. We address each of these arguments in turn.

The plaintiff school districts first argue that the causes of

action are not property of the estate because the claims do not

allege that the debtor suffered any injury or harm. We disagree

with this broad assertion. Several of the causes of action allege

a direct injury to the debtor, from which an injury to the

plaintiff school districts is derived. For example, the plaintiffs

school districts allege in paragraph XIII of the complaint that the

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defendants negligently managed EGHT, causing EGHT to become

insolvent and thus unable to pay the claims of employees of the

plaintiff school districts. To the extent that this cause of

action and others allege only a derivative harm to the plaintiff

school districts, they belong exclusively to the estate.2

We do agree, however, with the plaintiff school districts'

contention that some of the causes of action allege a direct injury

to the themselves, which is not derivative of any harm to the

debtor. For example, the plaintiff school districts allege in

paragraph XI of the complaint that the defendants intentionally

misrepresented to them the financial situation of EGHT, and that

they materially relied on such representations to their detriment.

To the extent that this cause of action and others allege a direct

injury to the plaintiff school districts, they belong to the

plaintiff school districts and not the estate.

In determining whether a cause of action may belong to the

estate, the bankruptcy court focused on whether the act or omission

complained of was directed specifically or generally at the school

districts participating in EGHT. Consequently, if the factfinder

were to find that the act or omission was directed generally at the

school districts participating in EGHT, then the cause of action

2
This assumes, of course, that the debtor otherwise could
have brought a cause of action under Texas law for its direct
injury as of the commencement of the case))e.g., the debtor could
have brought a negligence action under Texas law against the
defendants. Aside from the injury argument and shared-
responsibility argument, the plaintiffs school districts do not
dispute that the debtor could have raised the causes of action
listed in the complaint.

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would belong to the estate; if not, then the cause of action would

belong to the plaintiff school districts. The problem with the

bankruptcy court's framework is that it assumes, rather than

decides, whether a cause of action belongs to the bankruptcy

estate. Stated differently, the fact that creditors in general are

harmed does not determine whether a cause of action belongs to the

bankruptcy estate; rather, general harm to creditors necessarily

follows from the fact that the debtor has been injured.3 The

bankruptcy court's standard for determining whether a cause of

action belongs to the estate ignores the relationship between the

debtor and the nature of the injury suffered. Because that

relationship must be considered when determining whether a cause of

action belongs to the estate, we conclude that the bankruptcy court

applied the wrong legal standard to the causes of action listed in

the complaint.4

3
Another problem with the bankruptcy court's framework is
that it assumes, without explicitly finding, that the school
districts purchasing health care coverage through the EGHT
constitutes all of EGHT's creditors. Based on this assumption, the
bankruptcy court equates general harm to the school districts with
general harm to creditors.
4
We reject the argument that the bankruptcy court's
framework is somehow consistent with our prior opinion in S.I.
Acquisitions. There, we held that an alter ego action is property
of the estate under Texas law, and thus, can be brought by the
trustee on behalf of all similarly-situated creditors. See id.,
817 F.2d at 1153-54. We neither held nor implied that a cause of
action belongs to the estate simply because it could be brought by
many creditors, as opposed to only one. Interpreting S.I.
Acquisitions to stand for this latter proposition would violate the
well-established rule that trustees have no standing to bring
personal claims of creditors. See Caplin, 92 S. Ct. at 1688.

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 We decide, rather than remand, the question of what specific

causes of action belong to either party, as it is a matter of law

based on the application of the legal standard discussed above to

the facial allegations in the complaint. Accordingly, to the

extent that the complaint alleges an injury to the plaintiff school

districts which derives from a direct injury to the bankruptcy

estate, we hold that the following claims belong solely to the

estate: (1) the claims that the defendants negligently managed,

and conspired to negligently manage, EGHT (paragraphs XII-XIII of

complaint); (2) the claim that the defendants conspired to commit

fraudulent transfers (paragraph XII);5 (3) the claims that the

defendants conspired to make EGHT insolvent and to commit fraud on

EGHT (paragraph XII); (4) the claim that the defendants breached

their contracts with EGHT, as well as their duties of good faith

and fair dealing (paragraph XIV); (5) the claim that the defendants

were unjustly enriched with funds of EGHT (paragraph XV); and (6)

the claim that the defendants breached their fiduciary duties. See

Appendix paragraph XVI.

To the extent that the complaint alleges a direct injury to

the plaintiff school districts, we further hold that the following

claims belong solely to them: (1) claims based on violations of

the Texas Deceptive Trade Practices Act, and conspiracy to commit

same (paragraphs IX, XII); (2) claims based on violations of the

5
See MortgageAmerica, 714 F.2d at 1275 (holding that
because an action under the Texas Fraudulent Transfers Act is
essentially one for property that properly belongs to the debtor,
the cause of action belongs to the debtor).

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Texas Insurance Code (paragraph X); (3) claims based on fraud, and

conspiracy to commit fraud (to the extent that these claims are

based on alleged false misrepresentations to the plaintiff school

districts) (paragraphs XI-XII); (4) claims based on negligence (to

the extent that these claim allege a breach of a duty of care owed

to the plaintiff school districts) (paragraph XIII);6 and (5) the

claim that the defendants negligently misrepresented the financial

status of EGHT to the plaintiff school districts. See Appendix

paragraph XVII.

The plaintiff school districts also argue that the causes of

action listed in the complaint are not property of the estate

because the debtor's representatives participated in the acts or

omissions giving rise to the causes of actions. Implicit in this

argument is the notion that a debtor cannot raise a cause of action

for which the defendant may have a valid defense on the merits. It

is well-established that the bankruptcy estate succeeds to the

causes of action which the debtor could have brought as of the

commencement of the case, subject to any defenses the debtor may

have faced. 11 U.S.C. § 541(a)(1). However, the plaintiff school

districts fail to cite, and we cannot find, any support for the

proposition that a defense on the merits of a claim brought by the

debtor precludes the debtor from bringing the claim. That the

defendant may have a valid defense on the merits of a claim brought

by the debtor goes to the resolution of the claim, and not to the

6
For example, paragraph XIII alleges that the defendants
failed to use ordinary care to inform the plaintiff school
districts that the EGHT was insolvent.

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ability of the debtor to assert the claim.7 The latter, of course,

determines what is, or is not, property of the bankruptcy estate.

We therefore reject the plaintiff school districts' second argument

on appeal.

III

For the foregoing reasons, we REVERSE the decisions of the

district court and bankruptcy court, and REMAND for entry of

judgment in conformity herewith.

7
We cannot conclude from the allegations in the complaint
whether representatives of EGHT actually participated in the acts
or omissions giving rise to the causes of action. For this reason,
we find misplaced the plaintiff school districts' reliance on
Shearson Lehman Hutton Inc. v. Wagoner, 944 F.2d 114 (2d Cir.
1991). There, "it [was] uncontested" that the management of the
debtor-corporation cooperated with the third-party defendant in
stripping the corporation of its assets. See Shearson, 944 F.2d at
120.

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 APPENDIX

The complaint alleges the following:

IX.

VIOLATIONS OF THE DECEPTIVE TRADE PRACTICES ACT

9.01 The actions of Defendants Boon, Cunningham, Seale,

Labaj, Allen, and DeLeon in representing to the Plaintiff

School Districts that the EGHT was "sponsored" by TACS, was

done in such a way as to imply that the TACS had control over

the EGHT plan, which it did not. Said representations

violated §17.46(b)(2), (3) and (5) of the DTPA.

9.02 Defendants DeLeon, Boon, Cunningham, Labaj, and

Seale, in representing that "the liability of the

participating school and the trust for the payment of benefits

under the plan as of any date is limited solely to the assets

of the fund," in contradiction of §21.922 of the Texas

Education Code, violated §17.46(b)(12) of the DTPA.

9.03 Defendants AGL, Boon, Cunningham, Labaj and Allen,

by misrepresenting that substitute coverage at the same level

of benefits and premiums would be automatically extended on

September 1, 1988 for the Plaintiffs, violated §17.46(b) (12)

of the DTPA.

9.04 The failure to disclose that EGHT was having

financial difficulties, while continuing to market

participation in the EGHT to the Plaintiff School Districts

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was a violation of §17.46(b)(23) of the DTPA by Boon,

Cunningham, Labaj, Allen, Seale, DeLeon and AGL.

9.05 In their failure to disclose a conflict between

their actions as third part administrators of EGHT and as

retrocessionaires, Defendants Boon, Cunningham, Labaj and

Allen violated §17.46(1), (2), and (3) of the DTPA.

9.06 All of the foregoing acts, in addition to violating

specific sections of §17.46, as described more particularly

herein, constituted unconscionable actions or courses of

action by the specified Defendants, pursuant to §17.50(a)(3).

X.

VIOLATIONS OF THE TEXAS INSURANCE CODE

10.01 The actions of AGL, Boon and Cunningham, in acting

as third party administrators for the EGHT violated arts.

21.07-5 and 21.07-6 of the Texas Insurance Code.

10.02 The actions of Boon, Cunningham, Labaj, Seale,

Allen, DeLeon and AGL, described more completely in Paragraph

IX above, constituted violations of arts. 21.21 §4(2) and §16

of the Texas Insurance Code, Board Orders 18663, 37550, 41060,

41454, and §§21.3, 21.4, 21.103, 21.105, 21.112 and 21.203 of

Title 28 of the Texas Administrative Code, adopted by the

State Board of Insurance pursuant to authority granted by the

Texas Insurance Code.

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 XI.

FRAUD AND CONSTRUCTIVE FRAUD

Defendants Boon, Cunningham, DeLeon, Seale, Labaj and Allen

committed fraud with regard to the Plaintiff School Districts

in that their representations to the School Districts with

regard to the financial situation of the EGHT constituted

false representations of material facts which were made for

the purpose of inducing the School Districts to enter into

contracts with the EGHT, and which representations were relied

upon by the School Districts in entering the contracts with

the EGHT. In addition, or in the alternative, the actions of

said Defendants constituted constructive fraud in that they

concealed the financial condition of the EGHT and the improper

or inadequate structure of the EGHT plan and such concealment

was a breach of a legal duty, trust or confidence which was

injurious to the School Districts or by which undue and

unconscionable advantage was taken of the School Districts.

XII.

CONSPIRACY

12.01 The actions of Defendants Boon, Cunningham, DeLeon,

Seale, Labaj and Allen, were in the nature of a conspiracy.

That is, acts were committed by each of these parties in the

pursuance of an agreement to commit fraud, to commit

fraudulent transfer (in violation of §24.001, et. seq., TEX.

BUS. & COMM. CODE) to violate the Deceptive Trade Practices

Act, and to commit negligence.

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12.02 The actions of Defendants Boon, Cunningham, DeLeon,

Seale, Labaj, in terminating the reinsurance, were in the

nature of a conspiracy to make EGHT insolvent and/or commit

fraud on EGHT, to the detriment of the Plaintiffs.

XIII.

NEGLIGENCE AND GROSS NEGLIGENCE

13.01 Defendants Boon, Cunningham, DeLeon, Seale, Labaj

and Allen were negligent in the following particulars: in

failing to use ordinary care to inform the School Districts

that the EGHT was insolvent or in eminent danger of becoming

insolvent; in engaging in conflicts of interest in their

dealing with the School Districts and the EGHT; in failing to

take action to prevent EGHT from becoming insolvent or

improving its financial condition, rather than recommending or

accepting that EGHT file bankruptcy; by failing to properly

manage and oversee the administration of the EGHT; by

negligently misrepresenting the financial condition of the

EGHT to the School Districts; and/or by allowing and/or

recommending that the stop loss insurance be terminated, in

violation of §21.922 of the Texas Education Code.

13.02 Defendants Stop Loss and Unilife were negligent in

their involvement in the decision to terminate the stop loss

insurance for EGHT.

13.03 Defendant Boon was also negligent in having signed

a $2 million loan on behalf of EGHT without prior authority

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from EGHT and in failing to inform the School Districts that

the EGHT was $2 million in debt and financially unhealthy.

13.04 Defendant Cunningham was also negligent in

encouraging the EGHT Board to ratify the loan signed by

Defendant Boon without authority.

13.05 Defendants Boon and Cunningham were also negligent

in failing to reveal the conflict between their relationship

as their party administrators to the EGHT and as

retrocessionaires.

13.06 Defendant AGL was negligent in marketing a plan (the

EGHT plan) which was insolvent, without disclosing its

financial condition to the School Districts.

13.07 Defendant DeLeon was also negligent in his legal

representation of the EGHT, and therefore, in his legal

representation of the School Districts as members or

beneficiaries of the EGHT.

13.08 Defendants AGL, Boon, Cunningham, Labaj and Allen

were also negligent in misrepresenting that substituted

coverage at the same level of benefits and premiums would be

automatically extended to the Plaintiffs on September 1, 1988.

13.09 All of the foregoing acts by the specified

Defendants, in addition to constituting negligence,

constituted gross negligence which proximately caused the

Plaintiffs' damages and give rise to exemplary and/or punitive

damages.

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 XIV.

BREACHES OF CONTRACT AND OF THE DUTIES
OF GOOD FAITH AND FAIR DEALING

14.01 Defendants AGL and Boon, Cunningham, Labaj and

Allen, acting through various corporate fictions, breached

their contracts with EGHT, and therefore with the members

and/or beneficiaries of EGHT, by failing to pay medical claims

to Plaintiffs, and by failing to provide reinsurance and/or

properly protect or otherwise properly manage and/or structure

the EGHT plan. These actions also constituted breaches of the

duties of good faith and fair dealing by said Defendants.

14.02 Defendants Stop Loss and Unilife breached their

contracts with EGHT, of which Plaintiffs were beneficiaries,

by their failure to pay claims which were incurred by the EGHT

and breached duties of good faith and fair dealing by their

involvement in the decision to terminate the reinsurance.

XV.

UNJUST ENRICHMENT/QUANTUM MERUIT

Defendants Boon, Cunningham, AGL and Seale were all

compensated with funds of the Plaintiffs by EGHT for acts

which were not performed by them, and for which they should

not have been compensated. Accordingly, they should be

required to disgorge said sums and return them to the

Plaintiffs.

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 XVI.

BREACHES OF FIDUCIARY DUTIES

Defendants DeLeon, Seale, Boon, Cunningham, Labaj, Allen and

Stop Loss all owed fiduciary duties to the EGHT, and, as a

result, owed duties to the individual members or beneficiaries

of the EGHT, including the Plaintiffs, which duties were

breached by the actions more particularly described in

Paragraphs IX - XV herein.

XVII.

NEGLIGENT MISREPRESENTATION

Defendants De Leon, Seale, Boon, Cunningham, Labaj and Allen

committed negligent misrepresentation with regard to the

Plaintiff school districts in that they supplied false

information to the school districts regarding the financial

status of the EGHT, which statements were relied upon by the

Plaintiff school districts as more particularly described in

paragraphs IX-XVI, which was a breach of a legal duty, trust

or confidence and which was injurious to the school districts.

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